U.S. shale drillers challenge OPEC again

After two-year downturn, production is on the rise

When the who’s who of the oil industry met a year ago in Houston, Saudi Arabia’s energy minister had harsh words for U.S. shale drillers struggling with the worst price crash in a generation.

“Lower costs, borrow cash or liquidate,” said Ali Naimi, who managed the world’s largest oil-exporting business for more than two decades.

In the year since, the drillers have largely taken Naimi’s advice. While more than 100 have gone bankrupt since the start of 2015, the companies that survived have reshaped themselves into fitter, leaner and faster versions that can thrive with oil at $50 a barrel. Now, it’s OPEC that’s seeking solutions, desperate to drive prices up even further in a push to repair the economies of the countries it serves.

“The shale business is rejuvenated because of the difficulties it has been through,” Ben van Beurden, the chief executive officer of Royal Dutch Shell, said in comments last month.

After a two-year downturn spurred by oil’s plunge to $26 from $100, U.S. production is on the rise once again, opening the door for another showdown with the Organization of Petroleum Exporting Countries. The number of U.S. drilling rigs has grown 91 percent to 602 in just over nine months. Meanwhile, production has gained more than 550,000 barrels a day since the summer, rising above 9 million barrels a day for the first time since April.

And as shale returns with a vengeance, it’s not just the pioneer cowboys that dominated the first phase of the revolution in the Bakken of North Dakota. This time, ExxonMobil and other major oil groups are joining the rush. It’s a new reality that OPEC and Russia — the main forces behind the production cuts approved last year as a solution to re-balance the global market — are starting to acknowledge.

“With $55 a barrel, we see everyone very happy in the U.S.,” said Didier Casimiro, a senior executive at Moscowbased Rosneft.

Long a world leader in multi-billion dollar oil developments that take years to build and even longer to profit, Exxon is diverting about one-third of its drilling budget this year to shale fields that will deliver cash flow in as little as three years, Chief Executive Officer Darren Woods said this week. In January, Exxon agreed to pay as much as $6.6 billion in an acquisition designed to more than double the company’s footprint in the Permian basin of west Texas and New Mexico, the most fertile U.S. shale field.

Add to the mix the election of President Donald Trump, carrying the promise of fewer regulations, added pipelines and energy independence, and you see why the mood at CERAWeek, the conference that every year gathers oil executives, bankers and investors in Houston, will be far brighter next week than in 2016.

“North American oil companies are going to increase their spending by 25 percent in 2017 compared to last year,” said Daniel Yergin, the oil historian-cumconsultant who hosts the CERAWeek. “The increase reflects the magnetism of U.S. shale.”

U.S. benchmark West Texas Intermediate traded at $52.79 a barrel on Friday. Futures bounced between $51.22 and $54.94 in February.

So far this year, U.S. energy companies have raised $10.5 billion in fresh equity, with shale and oil service groups drawing the most investment, the best start of the year since at least 1999.